Tesla’s Third Quarter Report: A Reality Check

  Recently, Tesla released a report for the third quarter of 2023 that does not look ideal:
  total revenue was US$23.35 billion, a year-on-year increase of 9%, a month-on-month decrease of 6%; total gross profit was US$4.18 billion, a year-on-year decrease of 22%, a month-on-month decrease. 3.6%; gross profit margin was 17.9%, compared with 18.2% in the previous quarter. Among them, total automobile revenue was US$19.625 billion, a year-on-year increase of 5% and a month-on-month decrease of 7.8%. In the quarter, the company’s net profit attributable to parent companies was US$1.85 billion, a decrease of 30% from the previous quarter and a decrease of 43.7% from the same period last year. Due to increased investment in R&D such as Cybertruck and AI, the R&D expense rate for the quarter was 5.0%, +1.2pcts quarter-on-quarter; the operating profit margin was 7.9%, declining for four consecutive quarters.
  It is not difficult to see from this financial report that Tesla, as the leader of electric vehicles, has encountered an adjustment period, returning to the mean, and needs to wait for new powerful products or the era of intelligent driving to truly unfold.
It was a great change in the automobile industry

  Looking back at business history, it is not difficult for us to conclude that great changes in the industry must at least meet the following points: profoundly and thoroughly change the industrial chain and human living habits, redefine the industry, and bring new user experiences; or the dividends of the times will bring huge benefits to traditional industries. new demands. Continuous innovation has a first-mover advantage, while disruptive innovation has a late-mover advantage. The duration is long enough (more than 5-10 years), the market space is large enough; it is commercially viable and can bring above-average investment returns.
  Obviously, Tesla fits the bill. It took the lead in using software to redefine cars, changing cars from mechanical products to electronic products, starting a wave of automotive electronics; the core value of the future automotive industry will no longer be the engine, body, and chassis, but It’s the battery, the chip, the system, the data. Tesla is the product of technological self-catalysis and combinatorial evolution, and is a master of information technology. Benefiting from the large semiconductor and Internet industry environment in Silicon Valley, Tesla has many talents coming from well-known companies such as Apple, AMD, and Microsoft, and has worked hard to build it. With its first-mover advantage, Tesla was once the only car that could use smart driving functions as its core product strength.
  The core competitiveness of automobiles is becoming increasingly software-based. Through OTA over-the-air upgrades, its functions continue to evolve, and the iteration speed is far faster than that of traditional fuel vehicles. It can directly solve brake problems remotely because the code it needs to modify is not in the brakes. Tesla improves users’ sense of security, fun and intelligence when traveling, and reduces costs. It has a sense of the future and technology, integrating semiconductor, aerospace, and information technology. It is a cool smart and environmentally friendly car. The automatic driving function brings more security and driving fun to consumers. Users can interact with the car and special features through the software APP. With more interactions, Tesla Company can continuously upgrade and iterate, and its car maintenance costs are greatly reduced.
  Strong acceleration is one of the biggest advantages of electric vehicles compared to ordinary fuel vehicles. Even the lowest-spec Tesla Model 3 can accelerate from 0 to 100 mph in 5.6 seconds, and the top-spec version can accelerate from 0 to 100 mph in 5.6 seconds. 3.4 seconds. It is almost impossible for traditional gasoline vehicles of the same level and price to have such strong acceleration performance. The emergence of Model 3 has accelerated the popularity of electric vehicles in mid-range vehicles and expanded market capacity.
  Autonomous driving is a brand new technology that changes the world in profound ways. Tesla’s approach to autonomous driving is to put as many sensors as possible into the cars it sells and collect as much data as possible from those sensors. Since its cars have been built on a software platform, as various autonomous driving miles continue to accumulate, it can be pushed to the cars in the form of software updates. Since it already has so many cars with sensors, it will create a self-reinforcing winner-take-all or network effect: it will have more data (currently billions per month), more data It will make its autonomous driving better, so more Teslas will be bought, which will then generate more miles and data.
  To sum up, this great change has caused Tesla’s stock to rise more than 410 times, the highest since it went public, with the largest increase of more than 30 times after the launch of Model 3.
Haven’t gotten rid of manufacturing attributes yet

  Since 2023, with the restoration of excessive pessimism about the U.S. economy and the AI ​​boom started by ChatGPT+NVIDIA, Tesla charging piles have basically become a universal standard in the United States; this series of events has driven Tesla’s stock price to soar, almost to the point of Close to $300/share. However, the recent third quarter report has brought it back to reality.
  Tesla advocates vertical integration and heavy assets, and has created a new production method of integrated die-casting. However, the battery layout is late, resulting in the self-produced 4680 production capacity being unable to ramp up. This also leads to the relatively slow cost reduction of the entire vehicle. main reason. Previously, Tesla had used its first-mover advantage and technological leadership to transform its car-making process and sales approach from the inside out in the form of new energy vehicles, ultimately transforming a company with low barriers and gross profit margins that have been hovering around For about 15% of the manufacturing industry, the threshold has been raised. But judging from the layout and the gap between competitors, this is not a high-barrier business like “I have what others don’t have, or I have advantages when others have them, making it difficult for competitors to catch up.” In fact, in the third quarter report, Tesla’s gross profit margin on vehicle sales (excluding regulatory points) further fell to 15.7%, and sellers generally expected around 18%.
  Therefore, today, when smart driving has not yet achieved breakthroughs, Tesla’s more attributes are still manufacturing, and Tesla’s valuation is still embarrassing. The predicted PE in 2023 is as high as 70 times. It is obviously stepping out of the industry’s high level. After the growth dividend, AI and intelligent driving are currently not supported. A more down-to-earth judgment lies in the judgment of the growth of car sales, which is the basis of its valuation.
  Take Apple as an example. In the era of the “hardware” story, PE fluctuations were basically driven by products, and the fluctuation range was only between 10 and 20 times. It was only after the “Internet” story of both software and hardware was implemented that the system came into being. The valuation is constantly elevated, fluctuating between 20 and 40 times, and stabilizing at 20 times.
  Tesla once gave an overall car sales target of 50% compound annual growth in 2021. When the market shifted from supply to demand in early 2023, the company gave a clearer explanation-50% growth. It was chosen at a low starting point in 2020. That year was when the Shanghai factory was put into production and Model 3/Y began to explode in volume.
  Now that the increased volume has been realized, but the new production capacity cannot be increased quickly, the manufacturing of Cybertruck is relatively difficult. This conference call did not reiterate the confidence in the 50% growth target. Obviously, from a common sense point of view, the effects of production capacity ramping and manufacturing innovation in the past have diminished at the margin, and the rest are difficult nuts to crack. Tesla has adjusted its thinking on the production capacity king. First, it lowered the steady-state production capacity target of the two new factories and no longer mentioned the weekly production of 10,000 units. The new car Cybertruck will be ramped up in 2024. The company basically stated in the conference call Fully expected; and the suspension of production in the name of replacing old ones with new ones in the third quarter also implies the idea of ​​balancing production and sales. Since the increase in 2024 will mainly come from new plants, such an adjustment is likely to mean that the current market sales target of 2.3 million units in 2024 will be lowered, and the next new car platform that can truly support growth is likely to make a meaningful contribution in 2025. of sales.

  In fact, it can be clearly seen that the changes in Tesla’s car-making business since 2023 are getting worse, not improving, and the increase in valuation is basically due to the full spread of stories in other business lines. However, the fundamentals of the car-making business will not be strong in the coming year, and the short-term market’s linear extrapolation of Tesla’s performance pricing ideas will most likely face correction pressure.
Facing more intense competition

  Automobiles are originally a Red Ocean industry with complete market competition. As an industry changer and leader, Tesla has enjoyed first-mover dividends for 10 years, but many competitions are catching up, and the traditional European car giants are gradually finding their strength. Different from the evolution of social needs in the smartphone industry, before the arrival of autonomous driving in the automotive industry, travel from point A to point B is still a core need. No matter how cool Tesla used to be, it still has not gotten rid of the essence of the automotive industry. , the relevant ecology has not appeared, and it is far from Apple’s software ecology.
  A report from market research company Cox Automotive showed that U.S. electric vehicle sales exceeded 300,000 units for the first time in the third quarter, but Tesla’s market share fell to a record low. According to data from information services company Experian, Tesla still occupies more than half of the market share, but it has shown a steady downward trend in the past three years, far less than the 79.4% in 2020.
  In the Chinese market, Tesla faces the most intense competition and is gradually losing its past halo. Its two existing core models obviously cannot meet the diverse travel needs of a population of 1.4 billion. To resume high growth, Tesla must further develop its next-generation new platform and launch cheaper models to accelerate popularity.
  Regarding Tesla’s most important second growth curve, autonomous driving, the Dolphin Research Report pointed out that as one of Tesla’s most important markets, Chinese consumers are still purchasing electric vehicles based on their energy-saving and fuel-saving characteristics compared to fuel vehicles, and are more intelligent. Mostly just the icing on the cake. Judging from the ordering data in the third quarter of 2022, the FSD (fully autonomous driving) ordering rate in North America is 14.3%, and the Asia-Pacific region is only 0.4%. In addition, because the bottom layer of intelligent driving is a sensitive data monetization business, which involves a series of issues such as acquisition qualifications, local storage and processing, and the establishment of supercomputing centers, Tesla FSD may not be able to develop as expected in China.
  Although Tesla’s long-term logic remains unchanged, it is also facing various cruel realities in the automotive industry, with high competition, high investment and not necessarily high output. The company needs to take further steps to improve its profitability and reduce operating expenses. In addition, as market competition intensifies, the company may need to further adjust its pricing strategy and seek new market opportunities. At the same time, the company also needs to continue to increase investment in research and development to maintain its leading position in the field of new energy vehicles.

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